What Should the Supreme Court Do With Obamacare?

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The day of reckoning for the Affordable Health Care Act is nearly upon us. The last day of the Supreme Court's 2011-2012 session is tomorrow, which means we should get a ruling on the constitutionality of the law -- and the rest of the remaining laws that few care about -- tomorrow.

There's a small possibility that the Justices will punt, arguing that the insurance mandate hasn't kicked in yet, so the Supreme Court can't rule on its constitutionality yet.  As far as I can tell, pushing the decision back is unlikely, but everyone should be prepared for the possibility of a less than satisfying answer that's likely to blanket the health-care sector in uncertainty.

I'm not a lawyer, nor do I play one on the Internet, so rather than try to predict what the Supreme Court will do, I'll give you my opinion of what it should do -- and point out how that could help and hurt various companies.

First, the problem
As its name implies, the main purpose of the Affordable Health Care Act was to decrease the cost of health insurance.

Contrary to popular belief, health-insurance companies such as UnitedHealth Group (NYSE: UNH  ) and Aetna usually don't make more when the cost of insurance increases. In general, the companies are just passing along health-care costs and taking their standard markup for administering the plan and taking on the risk. Essentially, insurers just estimate the medical cost for all the members in a plan, add their markup, and then divide by the number of members to get the final cost.

The way to decease the cost, then, is to get healthier people into the pool. They'll require fewer medical expenses, so when it's averaged out, the cost per person goes down. Insurance companies do that now when they sign up companies and require all employees to be covered. The recent college grad who works out three times a week is subsidizing the less healthy in the office.

You could also remove the sickest people who require the highest costs, which would decrease the cost for everyone else. Insurers do that now, keeping costs of individual plans down by not allowing patients with pre-existing conditions to enroll in the plan.

But the object of the Affordable Health Care Act was also to increase coverage, which will work only if both groups -- the healthier who don't really need the coverage and those with pre-existing conditions -- are put in the same insurance pool.

If the definition of "unconstitutional" is "unfair," then I have to think the insurance mandate will be struck down. Clearly, the insurance mandate requires people to spend money on something that some people don't necessarily need. If the risk of getting sick is low enough, self-insuring makes financial sense.

Of course, we ask citizens to pay taxes that cover a wide range of services that they don't necessarily use. People who don't read still fund the library. And people without cars fund road repairs. Sometimes things have to be done for the good of society.

Also keep in mind that society ends up paying for those who choose not to pay for health insurance and get sick. Hospitals don't turn away patients even if they can't pay. To keep from going out of business, the hospital indirectly passes those costs on to those who are insured.

I think the Supreme Court should leave the law alone. I'll be the first to admit that it isn't perfect, but it's a step in the right direction. Sticking with the status quo will hurt some industries, especially medical-device makers such as Medtronic (NYSE: MDT  ) and Boston Scientific (NYSE: BSX  ) , which were hit with a hefty tax to help pay for coverage.

The worst thing the Supreme Court could do is throw out the insurance mandate without throwing out other parts of the law, especially the coverage for pre-existing conditions. Without the pool of healthy people, those with pre-existing conditions would drive up the cost of health care.

Of course, Congress has the capacity to remove the pre-existing-condition clause even if the Supreme Court doesn't, which I imagine the legislators would do -- after they finish running for re-election, of course.

Other options
If the whole law is struck down, Congress will need to figure out a better solution. We certainly can't continue to have costs spiraling out of control. I don't expect drugmakers such as Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) to stop their continued increase in the cost of medications, especially as drugs go off patent.

One possibility would be to passively increase the use of health insurance by requiring that insurers cover pre-existing conditions, but only for those who keep their health insurance active. In addition to increasing the pool of healthy people paying now so they'll have insurance later, the strategy would make health insurance more portable, which might increase competition, although I don't know by how much. Without a mandate, though, some people will continue to use society's backstop of paying for the uninsured as their "insurance."

What now?
Get some sleep. The Fool will have full coverage of the decision and how it will affect various companies tomorrow.

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Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Medtronic. Motley Fool newsletter services have recommended buying shares of Pfizer and UnitedHealth Group and have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2012, at 7:40 PM, lee1948 wrote:

    What a shocker someone on the motley fool staff thinks we should leave the bill untouched. Did you read all the thousands of pages? There are so many things in the bill that will tax and regulate and require hiring thousands of new public employees that will be payed for by the taxpayer. There provision in the bill saying your house has meet gov't mandated requirement before you can sell it,what does that have to do with health care? Nothing it is just more control by the gov't. You think a 2300 page bill is a good thing?

  • Report this Comment On June 27, 2012, at 8:01 PM, GLCBJC wrote:

    I couldn't disagree more. The issue that must be faced has nothing to do with who gets covered and who has what pre-existing condition. The law, at its core, is simply wrong.

    Brian, you make your argument from a paradyne that accepts the notion that government should have control over medical care, and that government intervention is usually best when considering most social issues.

    Here are a few axioms I have found useful in analyzing issues of this sort.

    - If you want something screwed up, leave it to government.

    Only they can really create the bureaucracy necessary to tank a workable idea. (I've always thought the best way to win the war on illegal drug use was to legalize it, then regulate it to death.)

    - When in doubt, look back to the constitution for guidance.

    Believe it or not, the Founding Fathers were aware of the notion that government would try to become nanny and provider of all for all. Check out the 9th and 10th amendments. In a nutshell, if the Constitution doesn't directly provide for a Federal version of a government service, it is not allowed to take on that function.

    In short, AHCA is unconstitutional simply because the 9th and 10th amendments forbid it.

    Sadly, we focus on the Commerce clause and miss the greatest argument against Obamacare; that it's none of the Federal government's business.

    Let the states deal with the medical issues of the day. They have the constitutional mandate to do so.

    (A little disclosure: BA in Public Admin, prior active participant in local political arena (admittedly Republican), have taught US Civics at the High School level, and it drives me crazy over what we don't know about civic discourse.)

  • Report this Comment On June 27, 2012, at 11:04 PM, TadpolesUS wrote:

    Why does this article even exist?

    The Supreme Court is going to make their ruling based strictly on the law. Why would anyone care what is on the author's wish list?

    Cut the readers a break and stop with the political propaganda.

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